Turning of the Screw

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Illustration by Leigh Guldig

For economic sanctions to be effective, their objectives must be clearly defined

By Tom Thomson

Are economic sanctions effective tools for achieving a country’s political and economic goals? They changed the course of history in South Africa by ending brutal apartheid policies. But United States sanctions on Cuba failed to remove the Castro regime from power. Fifty years later, these sanctions are still in effect and still a barrier to renewing U.S.-Cuban diplomatic and economic relations.

In 2014, the world is more interconnected than ever before. We are in a period of change, with rising political and economic powers, such as China and Brazil, demanding a reshuffling of the post-World War II international financial and security architecture and revised roles befitting their new political and economic prominence in the world. There have been sharp increases in volatility and conflict in the Middle East, Eastern Europe, and Asia. The choice of diplomacy and economic sanctions over military intervention to resolve conflicts, especially with several countries having nuclear weapons, is not just the obvious course but also an act of global self-preservation.

A key to effective economic sanctions – whether they are at the lower end of the scale, such as import tariffs, or at the higher end, such as asset seizures and sector sanctions – is to have clearly defined objectives.  Two recent high-profile examples illustrate why this is important: Iran and Russia.

In 2005, the United States imposed harsh economic sanctions on Iran to stop the development of nuclear weapons, avoid an escalation of regional tensions, and provide an alternative to preemptive military strikes. The U.S. formed a multilateral coalition, which included Iran’s longtime ally Russia, to prod Tehran into negotiations. The strategy worked. While the U.S. is no friend of the Iranian regime and labeled it a state supporter of terrorism, it did not link regime change to the objectives of the sanctions. Had it done so, building a multilateral coalition would have been impossible.

In the case of Russia (at this writing), the objectives of the American government and its European allies have been less clear. 

Initially, they punished Russia for its annexation of Crimea. Their stated objective was to bring Russia into multilateral negotiations on Ukraine’s future. Russia didn’t back down and provided military supplies to separatists in eastern Ukraine, and later deployed troops to reinforce separatist fighters against an advancing Ukrainian army. 

As the Western coalition enacted increasingly severe economic sanctions, the objectives expanded to include cessation of all military support to the Ukrainian separatists in eastern Ukraine. Would Russia be expected to give Crimea back and stop supporting the separatists as a condition for any serious discussions on removing economic sanctions? This lack of clarity has set a higher bar for the start of negotiations and has limited opportunities for discussions on isolated issues, which could result in incremental gains and momentum toward other agreements.

If the primary objective of economic sanctions is to make the other side blink, what happens if it doesn’t? The “turning of the screw” approach worked on Iran, because access to the international market for crude oil, its major export, and to international finance was closed. Iran was unable to supply its economy through import substitutions and external financing resources, resulting in an economic collapse and a return to negotiations.

If the primary objective of economic sanctions is to make the other side blink, what happens if it doesn’t?

Russia could follow the same course, but don’t bet on it. Yes, it has begun to feel the pain. Restrictions on access to long-term dollar- and euro-based financing have taken a toll. Higher levels of political risk have driven away foreign investment. Russia’s central bank has supported the falling ruble, and inflation has affected consumer prices. The price of crude oil has been flat. The sanctions have arguably contributed to Russia’s already-sagging economy. But could they force a country that has withstood unthinkable economic deprivations and human tragedy in the 20th century to alter its behavior? As long as public opinion in Russia is overwhelmingly in support of President Vladimir Putin and his Ukraine policies, it is not likely.    

A dangerous stalemate has been forming. Import substitution and access to financing will trickle in from non-Western countries over time. Russia has been feeling the most financial pain of all the concerned parties. But that could change if it starts to employ asymmetrical responses, such as expropriations of Western assets.  In this scenario, everybody would lose – Russia, the United States, and the European Union. The parties would be discouraged from finding compromises and encouraged to engage in high-risk, Cold War-like rhetoric and confrontations. And the Western coalition would find it more and more difficult to remain united.

In the business community, thoughtful voices have encouraged all sides to reconsider their vested positions and find common ground for agreement. Commercial diplomacy is greatly needed during difficult times such as these. Over the years, the U.S. alone has enacted sanctions on nearly 20 countries for violations of trade, elections, and human rights, among other reasons. Yet no matter how righteous the cause, economic sanctions that lack clear objectives, targeting disputants unwilling to compromise on their vested interests, will likely flounder and make a bad situation worse.

Tom Thomson (MBA, ’13), founder and principal of T. Thomson & Associates LLC in the Washington, D.C., area, is a business and communications strategy advisor to companies operating in the United States and abroad.

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